Posts Tagged ‘iphone’

“After Facebook released v1.1 of their iPhone application, they promised that a bigger, badder v2.0 was in the works for September. They cut it pretty close, but they’ve kept their word. Just a few hours ago, the second major release of the Facebook application hit the App Store, bearing a whole new user interface and a slew of fresh features.” Techcrunch

Techcrunch announced however i downloaded the app before this article cameout

My exp with 1.1 was annoying since you could’nt do a lot of new things that have made facebook even more addictive. Comments on newsfeed items, pic comment from a Div pop up etc etc ….

The Apple Digital Media Platform has been one of the runaway hits of this decade and driven a 400% gain in Apple’s share price over the last three years. Yesterday, Steve Jobs announced the entry into the movie rental business and a new version of the Apple TV Set Top Box. The bigger story which went unmentioned is that business model underlying the platform is showing real signs of strain and the players are showing signs of restlessness.

The Apple Digital Media Platform is a classic example of a multi-sided business model. As the user base increases, the more appealling and less risky it becomes to develop new hardware devices. As more hardware devices are sold, the more appealing it becomes for people to develop accessories. As the user base grows, content owners realise that it becomes an interesting distribution channel to sell content. As more content becomes available then more users are driven to the platform. As volumes increase then margins paid or royalties received from third parties can be increased.

In other words the Apple Digital Media Platform exhibits a high degree of positive network externalities or displays a virtuous circle .

The multi-sided Apple Digital Media Platform

The software platform itself has evolved from the inital release of Quicktime in 1991 on the Mac and in 1994 on Windows. It has always been available for free to users. The interesting strategic decision was to make Quicktime available for Windows from very early on, even when no revenues were being earnt.

The probable reason for this decision is that the Mac has a very small market share compared to Windows and Apple needed to have the broadest possible market available to make it appealing for content creators to make their content available on the Apple Digital Media platform. In these early days, the QuickTime platform was only of value in so much as it created extra sales of Mac hardware.

This changed in 2001 when Apple launched the ipod device and itunes software. This software allowed the synchronisation of music content between the Mac or PC and the ipod. Apple was now generating revenue from having Quicktime and the itunes software available on the PC as it now had a much larger addressable market. Effectively at this stage, Apple was effectively adopting a highly unusual give away the blades (software) and sell the razors (hardware) strategy.

This strategy should be compared and contrasted to the Games Console platform players who have adopted a strategy of discounting the hardware (consoles) and charging a premium for content (games).

It should be noted that at this time illegal file sharing had just kicked into gear with Napster reaching its peak popularity in 2001 and despite its closure it spawned many other yet more creative ways for the music lovers of the world to break the law.

It is therefore hardly surprising that in 2003 when the iTunes online store was launched it was welcomed with open arms from the record companies especially considering that tracks were to be charged at 99 cents with DRM and Apple wasn’t trying to make any profits from the download service.

The only internet infrastructure company making any sort of money from the iTunes stores was Akamai who Apple had chosen to build the Content Delivery Network and assure that tracks reached their destination in a timely manner. This relationship exists to this day and to my knowledge no ISP has ever directly profited for the Apple Media Platform.

As the iPod grew in popularity it began to attract the trivial (eg protective casing) and not so trivial (eg external loudspeakers) accessory providers. Apple designed a standard interface across all the ipod range to make life easier for the accessory makers. Apple apparently charge accessory providers a royalty for using the “Made for iPod” seal. The royalty rate is not in the public domain, but is estimated to be as high as $4/device.

This accessory market has grew to an over $1bn market. Accessories are also important for iPod independent retailers as they tend to have higher margins than the iPod itself. It is estimated that for every $3 spent on iPods $1 is spent on accessories. It also helps the independent retailers to differentiate against the Apple owned retail stores who don’t tend to stock all the accessories. Apple estimated that in FY2007, direct sales were a huge 57%.

The iPod has scaled huge heights with 52m sold in FY2007 compared to just 7m Macs or $8.3bn in ipod revenues compared to $10.3bn Mac revenues. Another example of the positive network externalities is that the iPod is creating positive momentum to Mac sales with a full 50% of Mac sales in FY2007 being new to the Mac. Undoubtedly a large proportion of these new users are attracted to the Mac because of the style and panache the ipod has added to the general Apple brand.

Apple launched in 2006 the hugely anticipated iPhone and has managed to sell 4m of these in the first 200 days. Apple claims this is equivalent to a 20% share of the US smartphone market in 3Q2007. The iphone adds a new twist to the model in that Apple have decided to grant exclusive rights to a single network operator in each country. This has enabled Apple to get a share of all voice and data revenues from the service. This share is estimated to be around 30%.

One of the few recent failures was the initial launch of Apple TV set top box. This has been redesigned and relaunched along with the addition of a movie rental business. Video capability was added to QucikTime back in 1999 and recent iPods have feature small screens for viewing content. 125m TV Shows and 7m Movies have so far been downloaded from the iTunes store.

Apple has recently broken through the 4bn music tracks downloaded level and now accounts for an estimated 70% of the worldwide digital download market with 85% share in the crucial US market.

Sales of Offline and Online Music 1H2007

It is hardly surprising therefore that tensions are starting to emerge with the record companies who are having rather a hard time of making money with the overall market declining in both revenues and volumes. The record companies seem to be fighting hard against the Apple DRM lock-in which currently allows Apple to tightly integrate both hardware and software and keep non-approved third parties out of the chain – there is very little interoperability.

All of the four major labels are allowing Amazon to distribute non-DRMed tracks at variable pricing. In fact Amazon has arranged a huge promotion with Pepsi to try and kick-start the platform attracting users by giving away up to 1bn tracks. This is similar to some of the earlier iTune promotions. We think for record companies although this reduces the dependence on Apple, it does not alter the fundamental deficiences of a “per track” business model.

More interesting solutions are the subscription services which has allowed digital sales in South Korea to overtake physical sales. All mobile operators have cheap all you eat subscriptions which are very popular with an estimated 1 in 6 subscribers taking out packages. Even the hugely popular online Cyworld game has managed to sell 200m tracks. However not everyone is positive, john Kennedy, the IFPI chairman recently warned “”Is Korean music market a panacea for the digital music market internationally or a case study in the devaluation of music?”.

A simlar story exists in Japan where mobile sales far exceed online sales. In addition Japan was the only region in the world where Apple actually saw falling revenues – drop 11% to US$1bn with only 300k Mac sold.

Universal Music Group is experimenting with subscription offers for the Neuf Cegetel ISP in France with an all-you-can-eat offer and also Vodafone and Telenor are experimenting with subscription offers for all the major record companies with the Omnifone platform. These are real challenges to underlying economics of the Apple platform. It cannot be long before Verizon fights back in States with some sort of innovative offer, especially as arch-rival AT&T has exclusive rights to the iphone.

The Mobile Industry is a classic cheap razors and expensive blades market: handsets are subsidised with expensive calls and ultra-expensive texts. Operators throw off prodigious amounts of cash which can be used to subsidise and market new applications. Apple are trying a model of both expensive razors and blades with limited distribution – we do not believe this strategy will not work for the mass market.

The other big issue for Apple is that long term platform rival Windows is finally starting to gain some traction in the mobile market as the operators are starting to realise that perhaps Microsoft are not as evil as everyone thought at the turn of the century. Certainly some mobile operators are already using Microsoft as a way of challenging the revenue share that they have to pay to Blackberry in the corporate messaging market. The Microsoft platform is extremely open compared to both the Blackberry and Apple platforms and also they don’t (yet) want a share of the ongoing revenues. Microsoft may be historically one step behind Apple in terms of technology, usability and more especially design, but they have always been one step ahead with the business model.

And this is all before, Google really enters the market with its advert funded model. A lot of people, we speak to about both the iphone say the most brilliant application is the maps which was written by Google and uses Google data. There is no way that Google will not port that application to every handset under the sun ultimately financed by some sort of advert funded model. In fact, there is already inferior version available for Windows, PalmOS and Symbian-based handsets.

In other words, Apple faces a lot of pressures from all corners of the platform.

In the short term, most of the platform pricing issues can be overcome with a little bit of tweaking to the model. Apple has larger issues in the medium term as the powerful content owners begin to ensure that there is competition in the digital distribution of their products. We do not believe the movie content owners will allow Apple anywhere near an 85% market share and over time the music companies will bring Apple share of digital downloads down as they strike subscription deals with the ISPs and Mobile companies. In the longer term, device makers will catch up with Apple usability features and we believe Apple will never have more than a niche share in PCs, mobile phones or set top boxes.

However all is not lost for Apple shareholders, the market segment who are attracted to the Apple digital lifestyle will tend to be higher income and prepared to pay a premium for their products which should allow a profitable future but at much slower rates of growth than in past few years.

The main lessons to be learnt from the Apple platform for the Telecoms industry are:

– it is relatively easy to continually innovate and add features to platforms over time; – multi-sided markets can be very profitable growth drivers;
– wholesale intermediaries tend to have increasing returns to scale, thus market concentration; and
– it’s better to enter a new market with a disruptive business model than a disruptive product proposition